Category: Asian Politics

This is the sort of quirk of economics that makes it be known as “the dismal science”. Nevertheless, it is certainly true that Japan is in the much better position than the US or Europe to finance a rebuild. If they can unlock domestic savings, and provide market based mechanisms for the allocation of resources above the obvious need to renew destroyed infrastructure, they will benefit the economy enormously.

In the meantime,quantitative easing (ie printing money) via the Bank of Japan to kick-start spending on reconstruction seems like a sensible thing to do without the inflationary pressure apparent in other first world countries. Since Japan appears to be in a deflationary environment, a boost to NGDP growth could only be a beneficial thing. These policy changes may indeed kick-start the Japanese economy back to life to the considerable benefit of the rest of the world.

If they do this, I predict they will return to more “normal” growth of 3-4% quite quickly and reduce their deficits very rapidly. No other countries have these opportunities in this way. Notwithstanding the tragic loss of life, in the long run for Japan it may open up a new chapter in their proud history, not all of it bad.

Yes a trade-off with between Taiwanese unification and Korean unification with the South in control maybe is something which could be put on the table. However, this would not get rid of China’s fear of having American troops at their borders. Maybe they could agree to leave the GIs in the South or even have then withdraw completely and replace by a UN international force. In any case, if South Korea controls the entire peninsula the need for US troops is not as great and South Korea itself has considerable military capability in its own right. With American military aid, surely this could be worked out.

There remains though the financial challenges of unification. There were many major mistakes in the German unification where it cost West Germany far more than it need have, principally moving to full unification immediately. Some sort of interim phase should be looked at where the market can adjust and investment can flow to the lower cost North Korea and with South Korean economic stability, management and institutions, as well as democratic base, there is no reason why North Korea could not morph into a low-cost economic tiger right on the doorstep of South Korea, Japan and China. Rather than costing the South, this could enhance the prosperity of the whole north asian region, including North China. In this though, unlike the two Germanies, it would be essential that for a time the North and South have two currencies, and their relative value can converge as the north approaches the South’s prosperity. This could take 50 years, but it would give the South (and China) a low-cost manufacturing tiger at their doorstep and provide a huge incentive for both the South and China to invest in a successful economic future for the North.

These same principles incidentally would come into play in a political solution to a Palestinian/Israeli settlement: Palestine (Gaza and the West Bank) becomes the low-cost economic tiger next door to high-cost, high-tech Israel and the emerging economy of newly democratic Egypt with its huge consumer base..

Isn’t it about time the North Pacific powers acted to dismantle the North Korean regime. I know they say they fear instability, but that is what they have now, and without coordinated action, this desperate regime just might turn their bluster into action soon. Nukes on Seoul or Tokyo would be far worse than a refugee problem at either end of the country.

Surely it is possible via the secret talks the Economist is suggesting, that the US, China, South Korea, Japan and perhaps Russia plan out coordinated action to move on a dismantling of the regime. China just needs to cut off power and water and the regime will collapse, but that would need to be followed by coordinated action in a way the Bush Regime didn’t act after the fall of Bagdad.

Even China may agree that a unified Korea would be preferrable to a trigger happy divided one. Oh and by the way, there are ways to avoid the cost of the German unification model. The single biggest mistake the Germans made was to initially unify their currency. A unified country, but with borders between North and South, but with a program of moving towards common institutions including political institutions, would not only create a lot bigger market, but would see a shift of investment from the high cost South to the low-cost North , and open up a flowering of economic activity that over the years would see the countries totally coming together. It may take 50 years, but increasing economic prosperity and political stability would be in everyone’s interests, not least China.

This is one instance where coordinated action is justified, just like Pol Pot, Bosnia, East Timor, and Nazi Germany.

China is playing a game when it comes to growth rates. All the independent think tanks I have seen recently have them above 10% growth pa over the next five years. Indeed only at the weekend, Australian numbers compiled by the private sector, particularly the resources sector, has demands for raw materials returned to pre GFC number by mid year and thereafter exceeding them by 10% or more per annum.

IS China playing these numbers down to justify their misleading projection on military spend, and/or to frighten their population into lessening the demands for social and economic reforms?